Sterling hit by bets Iceland row will grow

The pound tumbled to a five-year low against the dollar today as currency speculators bet that the UK's dispute with Iceland could spread to other countries.

Sterling was off 1.4 cents against the dollar at 1.6975 while the euro gained almost 0.6p to 79.79p.

Lee Wai Tuck, a currency strategist at Forecast in Singapore, said: 'There are some worries over the UK's exposure to Iceland.

'The British have put money into Iceland's banks and they are not able to access that.'

The British Government expects to pick up the tab for the money UK savers have trapped in Iceland's failing banks. The pound also fell against the yen.

Markets are watching whether finance ministers and central bankers of the Group of Seven can draw up a coordinated plan to tackle the growing global financial crisis.

UK finance minister Alistair Darling said ahead of the G7 meeting in Washington that he expected the communique to contain a commitment to protect retail savers, and urged other countries to guarantee inter-bank lending.

Sterling is languishing due to nervousness in UK public finances following the Government's sweeping bank rescue package. Growing expectations of falling interest rates has also kept the pound under pressure. Analysts expect two more cuts in November and December and for the bank rate to hit 2.5% or 3% in 2009.